Comment by caminante
6 months ago
The N=1 or handful of people that are your exception kind of prove the rule.
Here's the thing...if you want to be pedantic, you need to explain how someone persists such alpha over time with examples. Not easy.
edit: See my note below on RenTech.
I would think that the ways that people generate consistent alpha would include scale advantages, information asymmetry, execution advantages, geographical advantages and a strategic edge. Usually some combination of those factors.
Someone like Warren Buffet has a once in a generation skill combined with massive scale and information advantage (he sees deals in publicly-traded stocks before anyone else). You may claim that it’s not fair to cite Buffet here, but he’s just the most public example of market actors with a durable advantage.
I fully agree Buffett is a one of a kind investor who's outperformed. I would love to have owned BRK shares, and still think you can't really go wrong owning them. That said, his performance v. S&P 500, a simple index, hasn't persisted. Basically, Buffett lost his advantages and even started making public bets that index funds would outperform actively managed funds.
> I did the math and starting from 1965 to 2002, a period of 38 years, the compounded annual return of the S&P 500 was 10.02% while that of Berkshire was 25.66%. But—and here's the kicker—from 2003 to 2022, a period of 20 years, the S&P 500 delivered a 9.80% compounded annual return while Berkshire came in lower at 9.75%. [0]
He's gotten fined for insider dealing by the SEC. And I figure that a lot of his "alpha" came in the earlier days of the markets when there was less regulation.
FWIW, here's an interesting article on Buffett's alpha. [1]
> Previous researchers analyzing Buffett’s returns using conventional size, value, and momentum factors haven’t been able to adequately explain his outperformance, the authors say, leaving admirers to conclude that Buffett’s magic is pure alpha. So they extend the analysis by testing Buffett’s impressive returns — as measured by Berkshire’s stock — against two factors that better reflect his folksy investing wisdom: One called “Betting Against Beta,” which represents safe, low-beta stocks, and another called “Quality Minus Junk,” which represents the stocks of high-quality companies that are profitable, growing, and paying dividends.
The results? “Controlling for these factors,” the authors write, “drives the alpha of Berkshire’s public stock portfolio down to a statistically insignificant annualized 0.1%, meaning that these factors almost completely explain the performance of Buffett’s public portfolio.” The factors also explain “a large part” of Berkshire’s overall stock return, the authors add, as well as Berkshire’s private portfolio, insofar as their alphas also become statistically insignificant.
[0] https://www.linkedin.com/pulse/warren-buffett-has-underperfo...
[1] https://blogs.cfainstitute.org/investor/2012/09/11/chasing-w...